Can't we all just get along? Fee agreements, fee splitting & disputes

Fee agreements, and the disputes that often arise from them, present significant challenges for attorneys. Attorneys must be meticulous in preparing their fee agreements to ensure that they contain all important details regarding the representation, including the scope of the representation, the rates, record retention policies, policies regarding email security and AI use, and more. Drafting an exhaustive fee agreement can be time-consuming; however, it is a vital part of preventing and/or minimizing future issues. From a practical standpoint, fee agreements allow attorneys to maximize fee retention while avoiding malpractice claims or State Bar complaints.

No matter how thorough a fee agreement is, issues may still arise related to the representation itself. Clients may refuse payment, dispute attorneys' fees, or worst of all, simply cease communication with the firm entirely. Often these client actions arise from misunderstandings about billing or a client's financial constraints. Still, a client's failure to pay attorney's fees may force firms to expend money and resources attempting to collect the fees to which they are properly entitled.

Additionally, disputes over billing tarnish goodwill, damage client relationships, and waste valuable time that could be spent fostering relationships or doing the important business of lawyering. To prevent these disputes, best practice protocols related to fee agreements, fee sharing, billing, and related disputes should be in place at every law firm.

Communication with clients

Many disputes may be avoided entirely by a well-timed phone call or a courteous, thoughtful conversation. Often clients simply want to be heard. Other times, they have concerns regarding why they are being billed in a certain way or what was the "value added" related to a specific billing entry. A thorough discussion of best billing practices is beyond the scope of this article; however, one notable point is that block billing will almost always undercut an attorney's ability to satisfy a client's inquiries. Block billing frequently makes clients uncertain as to what was done. Detailed and shorter entries elevate transparency and dramatically improve client confidence.

Additionally, attorneys should communicate proactively and manage client expectations realistically. This may help to prevent disputes from escalating and frequently leads to referrals as well as repeat business. By contrast, poor communication may harm a firm's reputation, result in uncollected fees and fee disputes, and even lead to increased insurance premiums.

Client concerns regarding billing should be promptly addressed and not delegated. Be sure to review billing statements for accuracy and ensure detailed descriptions of work performed. See Cal. Bus. & Prof. Code § 6148 (2023). Personally review the statement with the client. Consider offering to write off or discount items that are valid entries to maintain goodwill and open dialogue. Do not charge for time spent discussing the bill and be sure to document discussion points afterward for clarity and future reference. Standardizing and adhering to best billing practices, including avoiding entries for: training, double billing, layered staffing, or block billing, helps to minimize and possibly even avoid disputes. Also, including "no charge" entries as a matter of course is a billing best practice that can further strengthen client trust and confidence in the attorney-client relationship.

Fee disputes and arbitration

When a dispute arises, verify that the client signed a valid and enforceable contract, received a copy, and a copy is in the client's file. The fee agreement must be fair, reasonable, and fully explained to the client. Alderman v. Hamilton, 205 Cal. App. 3d 1033 (Cal. Ct. App. 1988); Former Rule Prof. Cond. 2-107. Not adhering to the requirements of a valid agreement may limit the attorney to only recovering a "reasonable fee," potentially less than originally agreed upon. Cal. Bus. & Prof. Code § 6148 (2023); Gutierrez v. Girardi, 194 Cal. App. 4th 925, 125 Cal. Rptr. 3d 210 (Cal. Ct. App. 2011). Also, be sure to provide clients with information about Mandatory Fee Arbitration (MFA), including resources to initiate a dispute. Start by referencing your State Bar's website and local bar association as resources for the client to gather information or to initiate arbitration.

If a dispute is taken to arbitration, disclose in your arbitration brief any ambiguities or unfavorable aspects of billing documentation. Consider writing off contentious items and offering a small discount before arbitration to preempt issues. Be punctual and professional, to convey your respect for the arbitrator and your former/current client. Most importantly, have copies of all invoices or billing statements to facilitate discussions.

After arbitration, ensure that the neutral party clearly documents the obligations of both parties regarding payment, timing, and any other relevant matters. The State Bar of California can enforce Mandatory Fee Arbitration (MFA) awards against attorneys who owe clients refunds but fail to pay. See Cal. Bus. & Prof. Code § 6203(d) (2023). Enforcement measures may also include placing the attorney's license on inactive status until the debt is settled.

Fee sharing

Sometimes, attorneys for different firms may wish to share fees. That may be a true fee split or payment of an agreed-upon referral fee. The American Bar Association Model Rules prohibit referral fees unless both attorneys share joint responsibility for the matter. See Model Rule Prof. Cond. 1.5(e). However, jurisdictions differ on this, so check local rules. California requires lawyers from different firms to enter into a written agreement to divide the fee, provide written disclosure regarding the details of the fee division, and obtain written client consent to the fee division. See Cal. Rules of Pro. Conduct 1.5.1. Most importantly, the total fee must not increase solely because of the fee sharing agreement. See Cal. Rules of Pro. Conduct 1.5.1(a)(3).

Fee sharing can create disputes between attorneys and may also create joint liability. Chambers v. Kay, 29 Cal. 4th 142 (Cal. 2002); Noris v. Silver, 701 So. 2d 1238 (Fla. Dist. Ct. App. 1997). Arbitration is an effective means for addressing these issues.

Fee sharing with nonlawyers

In addition to fee sharing between attorneys, there are occasions where an attorney may seek to share fees with a nonlawyer. This is not permitted in most cases and most jurisdictions. Exceptions exist when dealing with nonprofit clients, where lawyers may be permitted to share fees that are either court-awarded or arise from a settlement agreement. See Cal. Rules of Pro. Conduct 5.4.

Alternatively, attorneys may employ an incentive or bonus program based on pre-established benchmarks to compensate nonlawyer staff and employees. For example, if a firm employs a person for business development and client intake, there may be performance goals that trigger various tiers of bonus compensation. Most importantly, remember that the nonlawyer's bonus or incentive must not be tied to recovery of or amount of attorneys' fees in any given matter. Again, jurisdictions vary, so check your local rules.

Conclusion

Navigating fee disputes and fee sharing can be complex. The best defense is always a best offense, so make sure to carefully craft fee agreements and to communicate clearly and professionally at the beginning of the representation to avoid or minimize any issues. If an attorney is unclear about how to proceed, craft a detailed fee agreement, or address billing questions from a client, it may be advisable to consult an ethics attorney and receive detailed guidance.